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By: Chris Rowe — July 3, 2012

Technical Tuesday - Healthcare Sector Breaks All Time Highs. To Buy or Not to Buy...

Some have argued that the recent Obamacare Supreme Court ruling is a win for everyone, even conservatives, because they can run against the "largest tax increase in US history".

There are a lot of traders eyeing the pop in the price of the iShares Dow Jones Healthcare Sector ETF "IYH" after the ruling, and saying that the healthcare sector certainly liked the decision. 

The focus is on a short-term move, but it's being discussed in the context of a long-term story -- which is a mistake!

I'll explain what I mean...

Below you can see the daily 1-year chart of IYH with a red arrow pointing to the gap/window higher (oval) after the Supreme Court ruling.  And you can even see that it's a breakout from a quadruple top!

Short term, that probably means more upside. 

But what's up with all the other (blue, green and red) lines on the chart?  They speak to the long-term trend.  Still up, but a bit overdone!

If you're going to play this long-term megatrend, that's a pretty smart play.  The smartest plays are the "no brainers".  We have the Baby Boomers who are retiring... while technoligical advances are happening in medicine... and it's a perfect storm for a booming industry. 

If you don't want to try to do that simple math, you can always just revert back to technical analysis.  After all, the number one indicator of future prices is price itself!

Let's zoom out to the 3-year weekly chart, below, to gain a better perspective of the long-term trend.  The lines on the chart may or may not make sense to you at this point.  But stay with me here...

I want you to see this chart before I jump right into the 12-year monthly chart, because you are able to see a lot more price detail in the chart below.  You can see that the recent (June 1st) low was set at the green uptrend line, which coincides with the horizontal light blue line at $73.57.

You can also see the thin red horizontal line drawn from the May, 2011 high (when the S&P 500 hit its high for the year).  Both lines have obviously recently been penetrated.  Both lines are key price points. 

But now let's zoom way out so you can see exactly how important the light blue horizontal line is, and why traders are very interested in it...

Below is a 12-year monthly chart of the iShares Dow Jones Healthcare Sector ETF "IYH".  Now, it should be clear that the light blue line I was just talking about goes back to the end of the year 2000 (before the bear market really kicked in for big non-tech stocks), stretches across to the 2007 double top (the next bull market's highs), and over to the recent June 1st low I mentioned above.  

Old resistance, once broken, becomes new support.  This came after a failed breakout attempt at the early May, 2011 stock market high.  It wasn't exactly the ETF that was unhealthy, but the stock market in general that took all sectors down with it. 

Now let's talk about the green uptrend lines. 

The steeper one connects the 2009 stock market lows to the 2010 lows, and stretches straight up through the 2011 lows (appearing to ignore them) which runs right up to the RECENT support level that I said coincided with the blue horizontal support level.  Many chartists make the mistake of abandoning an uptrend line just because it was once broken.  If you take a moment to go look at the first chart above, you'll see why that would be a mistake.  

And here's where the article comes full circle...

The short-term activity in IYH is getting the attention of traders who have been focusing on the long-term context.  In other words, based on the massive advance from the 2009 low, through the key resistance levels set in late 2001 and 2007 (while keeping in mind that the S&P 500 is still 13% off its all time high from 2007), it appears that the healthcare megatrend is here to stay for a long time. 

One can't argue with the Baby Boomer story.  And one can't argue with the price action that's outperformed the S&P 500 by far since the 2009 low. 

But here's the fly in the intermediate-term ointment:  Look at the volume at the bottom of the chart above.  You can see that, as the price of IYH advanced this year, the volume SIGNIFICANTLY decreased.  That's not a good sign for bulls.  It shows sellers stepping out of the buyers' way, as opposed to buyers overcoming strong selling pressure from the supply side.  

You might consider the long-term story of the Baby Boomer generation coming of age.  That story will be around for many, many years.  And my guess is, some time in the next year or two, this ETF will revert back to one of the two green trend lines illustrated above.  The second, less steep, uptrend line connects the 2009 low to the 2010 lows.  If the first, steeper, trend line is violated, the ETF may revisit the next up trend line -- and the bad price-volume action is telling us that's a very real possibility.

The idea is to not "buy on news".  That's when everyone's all excited about the story.  That's when sellers are getting out of the way of buyers, so the buyers drive up the price -- so that sellers can get out at a better price. 

I'm a big fan of IYH.  I mean, the breakout from all time highs is very compelling.  I think it will be much higher in a few years.  But I'm focused on the long-term picture, and I think long-term investors can pay a lower price for this ETF if they wait. 

Don't confuse the long-term megatrend and a short-term pop in the stock.  Stay focused on the time frame you've intended to work with.

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